Categorizing Alternative Investments

Most people I work with in the asset and wealth management industry know at least something about alternative investments. But the range of knowledge can be so wide that sometimes I am not sure we're talking about the same thing.

I find the below framework quite helpful in facilitating my conversations - despite some limitations I have noted subsequently. To paraphrase George Box - all frameworks are wrong, some are useful. If alternative investments is an area of interest, hopefully you find this useful too.

Here is a view that takes each of the wrappers, and breaks it down into common asset class / exposures they offer an investor. Each viable cell lists example exposures or strategies (non-exhaustive) and one or two notable product(s). The idea is to show the difference in exposures you get even if you invest in the same asset class, but under two wrappers. For example, private equity exposure in a private fund can be quite different from an interval fund (which needs to maintain a higher level of liquidity)

Notes on selected wrapper characteristics:

1) Wrapper: The columns represent a "wrapper" or a "structure". Going from left to right an investor generally has more liquidity (how quickly can you get your investment back). It's not strictly true on this graphic because you can sell listed BDC's and REIT's on the stock exchange on any given day, but the general idea is that private funds tend to be most illiquid, the middle wrappers (BDC, REIT, Registered Funds) tend to be semi-liquid and the alternative mutual funds tend to be most liquid (daily redemptions)

2) Investor Eligibility: Qualified Purchasers usually have $5M or more to invest. Accredited Investors roughly have $1M to invest, or an annual income of $200K. Retail is practically anyone.

3) Trading: A subscription document (sub-doc) is a multi-page agreement that the investor signs to invest in a given wrapper. Besides a variety of disclosures, it includes representations that the investor has to make about their qualification criteria (e.g. net worth, income). Exchange is the stock exchange, you would buy these wrappers just like you would buy Microsoft or Apple shares. NSCC in this context means Fund/SERV. It is an industry standard automated back office way to buy and sell mutual funds (between say broker-dealers and asset managers), and it can have huge implications for how much a given wrapper is adopted by investors and their financial advisors

4) Estimated AUM: These estimates are based on latest publicly available U.S. data as of July 1, 2023

Notes on selected exposures and products:

1) Gray boxes: The cells shaded gray are generally not viable exposure + wrapper combination. It makes for an easier representation, even though some exceptions apply. For example a BDC can hold private equity in addition to private debt, but you wouldn't typically have a BDC holding only private equity

2) "?" boxes: The cells with "?" are viable products in my opinion, but the industry hasn't launched products here yet (at least none that I am aware of)

3) Fund AUM: Each fund listed has an AUM next to it. It is the latest publicly available number as of July 1, 2023. For most private funds, it represents capital raised at (or near) final close

4) Notable products: The notable products listed in each cell are meant to represent both the kind of investment exposure available to investors in that category, as well as representative high end of assets raised in that category (as a proxy for opportunity)

Some framework limitations

1) Not comprehensive: This is a framework to facilitate conversations from a shared understanding. It does not include all wrappers (e.g. master limited partnerships) or all exposures (e.g. collectibles, cryptocurrency)

2) Simplifying assumptions to aid comprehension

• Hedge funds are shown as having public equity and credit exposure. In practice they can (and many do) invest in commodities and some private equity or credit
• Alternative mutual funds include exchange traded funds (ETFs)
• REITs are not an exclusive wrapper from others. A private fund or a registered fund can choose to be regulated as a REIT